Tuesday, August 31, 2010

Nate Silver, over at 538, a New York Times blog, has a post today about the “none of the above” option in Nevada. It seems that NOTA is polling well enough to have an effect on the Senate race, where a majority dislikes Reid but fears Angle. Lots of comments weigh in on the pluses and minuses of voting for no one.

I’ve thought for a long time that a simple improvement over the current system would be to give voters the option of voting for or against a particular candidate. If they vote for, the candidate gets an additional vote, the way it works now. If they vote against, one vote would be deducted from that candidate’s total.

There are two advantages. First, in many cases it will allow voters to more accurately express their preferences. If you really don’t like candidate X and are neutral about candidate Y, negative voting makes your feelings clear. In fact, if there are more than two candidates in the running, stopping one of them may be your highest priority.

Second, the final tally may give a better representation of the public’s true feelings, especially if the winning candidate is the one with the least negative numbers. We would hear less nonsense about mandates.

The Charlottesville Daily Progress reports that in the morning of August 30, Judge Paul M. Peatross, Jr. of Albemarle County (around Charlottesville) ruled in favor of the University of Virginia against the subpoenas by Attorney General Ken Cuccinelli who sought documents including emails on the research of former U.Va climatology professor Michael Mann, "in their entirety, without prejudice."

Most observers are very pleased with this, including Michael Mann reportedly, now at Penn State, and I am also. However, there is an unfortunate caveat in the story. The judge also ruled that Cuccinelli has the authority to issue further "civil investigative demands" (CIDs), although they need to be more specfic than the ones he issued earlier that were struck down by this judge. Thus, I saw Cuccinelli on local TV earlier this evening proudly declaring that he would be right back at it again with further CIDs for U.Va, although this time more specific so that he can "satisfy this judge." So, unfortunately this business is not over at all, despite this favorable ruling for the moment. The assault on academic freedom will be continuing in Virginia, along with the publicity machine for Cuccinelli to be a big hero for the Know Nothing right wing.

"Germany has surprised the world with a sharp acceleration in its economic recovery, but perhaps the least impressed by this feat are Germans themselves. The German economy expanded a sharp 2.2% in the second quarter from the first -- the fastest pace since reunification in 1990. But, despite the export-driven rebound, most German workers aren't getting any richer."

"Chancellor Angela Merkel's government has hailed Germany's "job miracle" after whittling the jobless rate down to 7.6% of the work force, compared with unemployment levels of about 10% in the U.S. and France. But the bulk of that reduction has come from the emergence of part-time jobs, often at low pay. That helps explain why German domestic demand has remained sluggish even as German exporters boast booming foreign orders. The disparity has drawn accusations from Germany's neighbors, notably France, that it is exploiting the world recovery without contributing to global demand.""Average annual net income per employee has fallen steadily since 2004, reaching 15,815 euros in 2009, down from 16,471 euros in 2004. As part of the so-called Hartz IV labor-market overhaul program to support low-income groups, the government has spent 50 euros billion in welfare subsidies since 2005 for people who earn too little to make a living."

"Lobby groups for low-paid and unemployed workers worry that an increasing number of jobs have to be subsidized. "Hartz IV has made it possible for companies to get their profit subsidies from the general public, with companies paying starvation wages while those affected need Hartz IV to survive," said Martin Behrsing, spokesman for the Unemployed Forum Germany."

"Another measure for low-income workers is looking at people who earn two-thirds or less of the average income. By that measure, the number of low-paid workers increased by almost 2.3 million people to 6.55 million between 1998 and 2008, according to a recent study by the Institute for Employment and Qualification at the University Duisburg-Essen."

"The Organization for Economic Cooperation and Development's employment outlook report 2010 shows that 21.5% of Germans worked in the low-pay sector in 2008, up from 16% in 1998. In an international comparison, the share of low-paid workers remained unchanged at 24.5% in the U.S. and increased only slightly in the U.K. to 21.2% from 20.8%. The average among OECD countries is 16%."

"I think we have seen in Germany for quite a while now an expansion of the low-wage sector, since the mid, late 1990s," said Herwig Immervoll, an economist with the OECD, which is based in Paris. "There is an increase in the inequality in Germany. We see this in other countries too, but maybe not as much as in Germany."

"Duisburg-Essen University's employment institute puts it even more starkly: "No other country has experienced a similar increase in the low-income sector over the past years and a differentiating of wages to the downside as Germany has," it says in its study."

"The upswing hasn't reached me. What I am witnessing is exploitation. There is more and more low-paid work. People don't find work, and if so only as temporary work, which is a great mistake because it's destroying the wage system," Mr. Friedrich said. "It might well be that the upswing has reached the big companies and that they are making more money, but it's the opposite for the ordinary guy," he said."

"Such sentiments are weighing on Ms. Merkel's center-right government, whose popularity has been tumbling in opinion polls that increasingly favor the center-left opposition. One recent poll showed that four out of five Germans say they aren't personally benefiting from the rebound."

"Hubertus Heil, deputy parliamentary floor leader of the opposition Social Democrats, is angry about the increasing number of subsidized jobs and said a legally binding minimum wage is urgently needed. "It's a shame that people who work full time have to put up with this," he said."

"At present, Germany has no general minimum-wage level. Minimums do exist for specific sectors, such as for the construction, cleaning, waste and nursing sectors. To match the minimum-wage levels in other European countries, Germany would have to introduce hourly minimum pay of between 5.93 euros and 9.18 euros."

"The DGB umbrella group of trade unions has called for an hourly minimum of 8.50 euros. But others, such as the Ifo economic research institute, warn that this could result in the loss of 1.22 million jobs, largely among those earning low incomes."

"Nelli Einstein, a 48-year-old from Berlin, has been selling clothes, bags, jewelry and tools for 1 euros apiece for the past two years. It sometimes takes her as long as a year to sell 10,000 euros of merchandise."

"The surprising strength of Germany's economic rebound is exacerbating an already worrying problem for legions of its companie Industrialists and economists long have warned of a looming shortage of skilled German labor, a consequence of the country's declining birth rate and an exodus in recent year of engineers and other highly trained workers, to around the European Union, the U.S. and elsewhere. But the rapid recovery of Germany's export-fueled economy in recent months has suddenly brought the problem home for many domestic companies, which fret that the shortage could restrain their ability to respond to the nascent rebound."

"Though German unemployment still hovers around 7.6%, about 70% of German companies report they are having trouble finding enough master craftsmen, technicians and other skilled labor, according to a survey released this week by the DIHK Association of German Chambers of Industry and Commerce. Companies haven't been able to fill some 36,000 engineering jobs open across the country, the Association of German engineers reports. "

"Bitkom, Germany's largest information-technology industry association, says the same goes for 43,000 IT posts. "

"And this is happening just barely out of the severe recession of 2009," said Hans Heinrich Driftmann, DIHK's president. "As the economy improves and companies need to hire more people, it's only going to get more severe."

"For now, Germany's marquee corporations, such as Siemens AG and BMW AG, have enough skilled job applicants, thanks to aggressive recruiting and generous training programs. But many of the country's Mittelstand, the thousands of small to mid-size companies that are the backbone of its export-led economy and provider of 70% of German jobs, are struggling to find needed employees as demand picks up."

"One is DELO Industrie Klebstoffe GmbH, a Bavarian maker of industrial adhesives. With ?30 million ($38 million) in sales and 230 employees, the family-owned firm is looking to hire another 60 highly skilled workers this year as orders from the electronics, auto and other industries take off. But so far, filling the posts has been difficult."

"We're troubled most of all by the search for technicians and engineers," said DELO Executive Director Sabine Herold. Located near Munich, the company says it is tough to compete for skilled job candidates with better-known companies in the area, so Ms. Herold has been trying to forge closer ties to universities and vocational-training institutes, and sponsoring business programs at local high schools."

"Behind the growing shortage is a combination of demographic trouble spots. Like in many European countries, Germany's declining birth rate-at 1.38 children born per woman on average in 2009-isn't enough to keep its population stable. And since 2008, more people have been leaving Germany than immigrating to it. That tendency is particularly strong among those with university or vocational training degrees. Last year, some 27,500 post-secondary-school graduates came to Germany from other European countries, for example, while 32,000 left for elsewhere in the European Union. "

"Economists estimate the skilled worker shortage is resulting in annual economic loss of between 15 billion euros and 20 billion euros, and with that, more potential jobs. "If there isn't enough skilled labor, then there can't be more production," said Klaus Zimmermann, president of the DIW German Institute for Economic Research. "

"Major companies are acting to counter the trend longer term. BMW and Siemens, for example, have expanded in recent years programs that train apprentices in specialized technical fields as they pursue post-secondary degrees at universities or technical colleges, thereby compressing the training time before they can fully join the work force."

""They don't have any difficulties getting hired. They're in great demand," said Gnther Hohlweg, head of Siemens' training programs, who adds that 90% remain with Siemens."

"Others are using older workers. German auto-supplier giant Robert Bosch GmbH maintains a reserve of several hundred semiretired skilled employees between ages 60 and 75 that it taps when it has to ramp up production and can't find enough qualified labor on short notice."

"Daimler AG, which manufacturers Mercedes-Benz cars, anticipates that within 10 years half of its workers will be older than 50 years, compared with 25% now. To accommodate them, it has introduced more flexible shift rotations and installed strength-training equipment near plant assembly lines. According to this month's DIHK survey, 21% of the 1,600 companies polled said they would take steps to draw more older workers."

"As Germany's economy has gathered strength in recent months, the skilled-worker shortage has reignited a debate about immigration policies, and created a new source of tension within Germany's center-right governing coalition."

"Earlier this month, the country's economics minister, Rainer Bruderle, proposed introducing cash "welcome" payments to lure more skilled foreign workers to Germany, as well as lowering the minimum income level it requires for skilled workers to be eligible for extended immigrant status. The current annual income level is 66,000 euros, which many economists and companies say is too high." "The proposals were quickly rejected by labor leaders, as well as a spokesman for Chancellor Angela Merkel, who said the government just introduced immigration policies in January 2009 aimed at making it easier for foreigners trained in Germany to find work there, and their effect had yet to be felt."

As has been widely reported, Co-Chair of the Deficit Reduction Commission, former Senator Alan Simpson (R-WY) told some people from the Elderly Womens' League that social security is a system that involves "310 million tits." Many have called for his resignation, and I would say that quite aside from the obnoxiousness of such a comment, his presumption that "social security is a problem" certainly calls for it.

However, rdan over at angry bear says that he should not be removed. This would just lead to him being replaced by some other anti-social security slug, and things would proceed as before. Instead, he should be forced to debate the issue on TV, either before or after the upcoming elections. I do not know which is better, but I am certainly concerned that the key people on that commission are so stacked to attacking social security, most likely through raising the future retirement age, when it appears that some groups of the population that may need social security the most, such as poor women, may actually be experiencing decreasing life expectancies.

Uwe Reinhardt repeats a familiar refrain from critics of welfare economics, that compensation tests do not erase the value judgments implicit in ignoring the distributional effects of policy. This goes way, way back, and Reinhardt might have been more forthcoming about the attempts by economists to bring distribution back in via refinements to benefit-cost analysis and other techniques. His point remains pertinent, but it misses the real problem with welfare economics.

Welfare econ rests on utility (or “preference”) theory, the idea that a person’s well-being has a stable and predictable relationship to the consumption choices they make. Reinhardt worries that economists are simply adding up utility gains and losses without taking into account who’s winning or losing, but the more fundamental issue is whether utility (or “preference satisfaction”) has any validity to begin with.

There are two deep problems with welfare economics. The first is that it actually assumes that well-being is identical to consumption choices. The absurdity of this proposition was demonstrated decades ago in several pungent articles by Amartya Sen, and no one, to my knowledge, has successfully rebutted him. The empirical failure of this assumption has more recently been exposed by “happiness studies”. There are raging disputes between happyologists (on the Easterlin paradox, for instance), but there is no doubt any more that, on an individual level, a chasm has opened up between “preference satisfaction” via consumption and empirical measures of well-being.

The second problem is that welfare economics depends on the assumption that choices are rational, that utility is actually maximized by each choice made by each individual in each situation. If you’ve paid any attention to behavioral economics, you’ll know that one went out the window some time ago.

So the problem is not just that economics fudges the distribution of utility, but that utility itself has become a sort of phlogiston, a make-believe substance that once served to prop up a theory, but got put to death by the evidence and is now no more than a curiosity studied by antiquarians and professional Scrabble players.

Thursday, August 26, 2010

In an earlier post, I expressed my initial hopes and later disillusionment with Matt Bai. But it’s worse than that, folks. In today’s Times, Bai writes

The coalition bases its case on the idea that Social Security is actually in fine fiscal shape, since it has amassed a pile of Treasury Bills — often referred to as i.o.u.’s — in a dedicated trust fund. This is true enough, except that the only way for the government to actually make good on these i.o.u.’s is to issue mountains of new debt or to take the money from elsewhere in the federal budget, or perhaps impose significant tax increases — none of which seem like especially practical options for the long term. So this is sort of like saying that you’re rich because your friend has promised to give you 10 million bucks just as soon as he wins the lottery.

No: it’s like saying you’re rich because you have ten million bucks in Treasury bonds.

The finances of SS are just fine, thank you. And no matter how you juggle the money, the consumption of every retired generation is produced by those who are working at the time. Either you are willing to pony up for the geezers or you aren’t. Matt is apparently a catfood kind of guy.

Wednesday, August 25, 2010

Charles Walgreen was a major influence on Chicago economics, both leading witch hunts against unreliable academics and funding others, including George Stigler, who used these resources to significantly shape the discipline of economics. Here is another take on his career.

Okrent, Daniel. 2010. Last Call: The Rise and Fall of Prohibition (New York: Simon and Schuster).

197: Charles Walgreen ... who built his Chicago-based chain from nine locations in 1916 to twenty four years later. In 1922, Walgreens introduced the milk shake, which family histories have credited the chain's next growth spurt. But it's doubtful that milk shakes alone were responsible for Walgreens rocketing expansion from 20 stores to an astonishing 525 during the 1920s. Something Charles Walgreen Jr. told an interviewer many years later suggests another possibility. The elder Walgreen worried about fire breaking out in his stores, his son recalled, but this apprehension transcended concern for his employees: he "wanted to get in as fast as possible and to get out as fast as possible, Charles Jr. remembered, "because whenever they came in we'd always loose a case of liquor from the back."

The current flap over Alan Simpson’s idiotic emails is above all about what kind of guy he is and whether he should be co-leading a high-profile commission for Obama, but behind it is a basic philosophical debate over the concept of social insurance.

The neoliberal caucus, which includes the Pete Petersons, Alan Simpsons and Paul Ryans of this world, believe in incentives. Each one of us, at every moment, should have an unmistakable incentive to work as much as possible, save as much as possible, and do everything else to promote economic growth. Marginal tax rates should be rock-bottom, and no government program should shield us from the consequences of our failure to accumulate wealth. It is pure social darwinism.

Their sworn enemy is social insurance, the idea that the members of a society would want to pool their risks and achieve a bedrock of security. This means opposition to any form of national health insurance, which pools our medical expense risk, Social Security, which pools retirement risk, and unemployment insurance, which pools labor market risk. We should be prepared, they say, to sink or swim on our own and not look to the “nanny state” to take care of us.

I think it’s time for the other side, a.k.a. the forces of civilization and progress, to defend social insurance. It is an enormous advance for a society provide economic security to all its citizens. It gives us peace of mind, and it expresses a humane concern for the well-being of all members of the community, something we should not be ashamed to embrace as a moral principle.

Sure, insurance always comes bundled with moral hazard issues. Some people will react by doing things that increase the risks we insure against. But this is not a reason to abandon insurance, just to design programs carefully so that moral hazard doesn’t get out of hand. If you think Social Security has generated disincentives that need to be fixed, indicate what they are and help come up with solutions. Don’t reject insurance itself; it’s one of the highest achievements of the last thousand years of human development.

Tuesday, August 24, 2010

In addition to the higher salaries for university executives, academic management is continually becoming more bloated. In effect, picking up the worst practices of corporate America. Here is the report from the Goldwater Institute.http://www.goldwaterinstitute.org/file/4942/download/4944 (.pdf)

Today, August 24, 2010, is the 40th anniversary of the bombing of Sterling Hall on the University of Wisconsin-Madison campus. For the first time since then, family of the anti-war physics researcher, Robert Fassnacht, who was killed in the bombing, have spoken publicly, notably his daughter, Heidi, in this past Sunday's Wisconsin State Journal.

She reports that the family is doing fine, and his son is now a professional astronomer. She also reports that at the time of his death, it was believed by many around him that Robert Fassnacht was nearing a scientific breakthrough in cryogenics that might have aided long distance electricity transmission. He was up late keeping an eye on the Dewar flask of liquid helium for supercooling in his lab's experiments. The last person who saw him alive was a security guard who saw him at 3:30 AM and reminded him to turn off the lights when he was done. The guard saw him sitting at his desk "furiously scribbling notes on a pad" that was destroyed by the bomb, along with all the lab's equipment, which went off 12 minutes later.

Leo Burt, one of the four bombers, remains at large. Of the others, all of whom served prison time, Karl Armstrong runs a fruit juice stand in Madison; David Fine is a paralegal in Oregon, and Karl's younger brother, Dwight, died earlier this year. A late comment on that post on Aug. 6 by "Christopher" sympathetically describes the much-troubled Dwight in his final year of life.

In my earlier post I reported that Karl Armstrong had unequivocally apologized for his actions, something that is not what one sees in some sources. In tracking this down for confirmation of what I heard in person, I came across a fascinating 72-page senior honors thesis (.pdf) from Lawrence University in 2004 by Andrea Rochelle Blimling entitled, "Blood on the Third Coast: Consequences of Madison's 1970 Sterling Hall Bombing". This is extremely interesting and largely accurate, as near as I can tell and remember. One can find a statement of remorse by Karl Armstrong on p. 55, and an account of what I reported on p. 58, although it differs slightly from my memory (its source is Paul Soglin, then Madison's mayor, who was in attendance as I reported). I remember Karl Armstrong saying more than Soglin recalls, and I recall dead silence after his speech, with no attempted rebuke by Ken Mate.

BTW, I found this thesis while searching for an article in the Wisconsin State Journal that reported Armstrong's apology, but could not find it. However, I remember it well because my father read it and snorted in disgust and skepticism at the report of this apology. It was probably the last comment my father made on the matter, as he died less than two months later.

For the historical record, I note some minor errors in the otherwise very well done senior honors thesis.

The Dow demonstrations of October 1967 were a year and a half after the Selective Service demonstrations of Spring, 1966, not the "next semester."

The name of the local Congressman was "Kastenmeier," not "Kastenmeyer."

The anti-war Teach-In of 1965 took place in 6210 Social Science, not its supposed "Great Hall." The Great Hall is on the fourth floor of the Memorial Union and has been the site of many events, including many political ones, but many others as well, including the retirement dinner of my late father in 1978, Director at the time of the bombing of the Center that was the target.

Most of the Center's offices were on lower floors than the seventh, although above the labs that were hit by the bombing.

The protester who was unhappy with Paul Soglin in 2004 was Lee "Zeldin," not "Zelbin."

And the report pointed out an error in my posting. It was 2003, not 2005, when Paul Soglin ran again for mayor, and lost, being "the most conservative candidate" running.

My final comment on the anniversary of this tragedy, besides being glad to hear that Robert Fassnacht's family is doing well, is to hope as Peter Dorman noted in comments on my last posting, that if Leo Burt is still alive (or even if he is dead as many think), that he did or has made something useful of his life on the lam to somehow atone for what he did on August 24, 1970.

Our graph shows the interest rate on 10-year Treasuries from April 1, 2009 to now. Notice a bit of interest rate volatility with rates at times climbing to around 4 percent but the current interest rate being near 2.6 percent.

Between June 3 and June 8, 2009, yields on 10-year Treasuries rose to 3.88 percent from 3.54 percent after the smallest drop in U.S. payrolls in eight months

Why do we care that interest rates rose by 34 basis points in a week over a year ago in light of the fact that the interest rate on 10-year Treasury bills is now done around 2.6 percent? Does Lanman and Kennedy really think the slightest tendency to see decent real GDP growth is going to cause rising inflation and nominal interest rates?

Sunday, August 22, 2010

Higher education is not undergoing something like the financial reengineering craze that was so popular and so destructive in corporate America more than a decade ago -- cutting back on the workers and loading university presidents of million dollar salaries and perqs.

Here is the New York Times take on the lavish housing expenditures for Mark Yudof, president of the University of California. Everyone else is expected to willingly accept the necessary sacrifices for the good of the organization. The article begins with a "midnight move ... the latest chapter in a two-year housing drama that has cost the university more than $600,000 and has drawn senior U.C. officials into an increasingly time-consuming and acrimonious ordeal over the president’s private residence."

Early death reports are known to be exaggerated. For-profit educators' may be an example. With Congress and regulators threatening to cut off federal funding, share prices for the industry's top six by market capitalization have dropped by an average of 40% since May. From 2000 to 2009, the industry grew explosively, thanks to increased government spending and Bush-era deregulation permitting aggressive sales tactics. Taxpayer-guaranteed loans and grants flowing to the industry more than quintupled during those years, to $26.5 billion from $4.6 billion."

"Earning risk-free profits on taxpayer-guaranteed loans tends to lead to lower lending standards. Such is the case with firms like Apollo Group, ITT Educational Services and Career Education. They often market to low-income prospects -- eligible for the most aid -- and sell them high-priced degrees, maximizing government largess."

I will post some more on this later:Here is the rest of the Wall Street Journal article:

"ITT's two-year associate degrees can cost as much as $47,000, estimates Kelly Flynn of Credit Suisse. Yet the average starting salary for employed graduates -- 73% of 2009's class found jobs by April -- is only "slightly north" of $30,000, says the company. So default rates are high: 24% so far for loans extended in 2007. On some loans ITT extends itself, the company may assume close to a 45% loss rate up front, Ms. Flynn estimates."

"But losses on loans matter little for the companies. Since 85% of ITT's 2009 revenue came from government funds, taxpayers will suffer the deepest financial wounds. Government revenue for Apollo and Career Education in 2009 was 86% and 80%, respectively.""Proposed regulations would, among other things, cut off government funds if new tests show the debt burden on students is too high relative to post-graduate earnings. Data released by the Department of Education suggest that, to pass the tests, schools may have to cut tuition significantly. Meanwhile, on Capitol Hill, Sen. Tom Harkin may introduce tough reform legislation after the Government Accountability Office exposed the industry's hard-sell tactics."

"The latest push by schools is to target veterans, whose benefits let for-profit institutions skirt a rule that 10% of sales come from nongovernment sources. Strangely, such benefits count as nongovernment. The top five schools enrolling veterans are for-profit."

"Increased scrutiny will rightly keep the industry in detention for the moment. Although some appear cheap -- Apollo, Career Education and ITT trade at an average of six times 2010 estimated earnings -- it is risky to capitalize future profits that could be legislated away."

"And yet, just as Washington is now helping to crush the stocks, it is also likely to be what makes their longer-term survival likely. For the government to meet its goal of substantially increasing college graduates by 2020, it will need the for-profit sector. One example: Veterans Administration education benefits will increase to $9.5 billion this year from $4.2 billion. The financial aid gravy train that for-profit schools have so adeptly ridden is set to keep rolling."

A week ago, a Portuguese journalist asked me a few questions about current debates in macroeconomic policy: fiscal stimulus and monetary expansion versus deficit and inflation hawkery. I used the opportunity to organize some of the arguments I've presented in previous posts.1. With near-zero percent interest rates (negative in real terms) and $2.3 trillion balance sheet, and no clear results translated in growth, employment and credit to the real economy, which feasible options has the Federal Reserve? Is the FED playing a dangerous gamble as Kansas City FED’s chairman just said?

These are really two questions: (a) What arrows does the Fed still have in its quiver? (b) Is the Fed’s current set of policies elevating the risk of future inflation?

a) As many, including Ben Bernanke’s former self, have pointed out, the Fed can engage in almost unlimited balance sheet expansion through purchases of private sector debt. Thus, rather than exchanging MBS and similar items as they mature with long-term government debt–the current “hold steady” policy–the Fed could acquire even more. This option is predicated on the assumption that the economy can absorb much more liquidity, that the true risk is deflation rather than inflation. My own view is that a bit of additional quantitative easing can help at the margin, but that fiscal policy would more effectively offset the effects of private sector deleveraging on effective demand. Moreover, the level of private sector debt acquisition necessary to fully absorb this deleveraging would expose the Fed, and US taxpayers, to significant credit risk.

Another proposal is that the Fed should raise its announced inflation target. This originates with Krugman and is receiving a lot of support. To see why this may not work, note that it rests on two premises: first, that agents will adopt the target as their new basis for calculating real interests rates (making real rates more negative at the zero nominal lower bound), and that this recalculation will induce them to resume borrowing. The first is rather a leap under current conditions; why should agents believe that the announced target will be realized within their planning horizons? The second overlooks the fact that (1) many sectors of the US economy really are overleveraged and need to reduce their debt burdens, and (2) investment is stymied by a lack of anticipated demand, not the real cost of credit. But I don’t think raising the target will cause any harm, so why not? It would then be more consistent with the emerging view of (some) macroeconomists that the optimal inflation band in normal times may have an upper bound of 3-4%.

I should add that the weight now being placed on the Fed’s shoulders is unfair. Everyone is looking to them to forestall a second dip and put the US (and world) economy on a growth track, but that’s because we have given up on Obama’s willingness/ability to push significant policy through Congress. The Fed just can’t do it alone; it needs lots of help. The political paralysis in the US is an extremely important contextual factor. If the global economy does take a second plunge or simply remains mired for a prolonged period, future historians will surely place much more of the blame on Obama and Congress than Bernanke and the Fed. But they will also have harsh words for the failure of global policy coordination, with no leader willing to rise above short-term domestic political motives.

b) In the short run it is obvious that inflation is not a problem. First, it would require monetary expansion of Zimbabwean proportions to induce serious inflation at current levels of unemployment and productive slack. Second, a bit more inflation would be a good thing. The real question is, if the Fed continues to bulk up its balance sheet and private sector credit starts flowing again, can the Fed get out in time so that there isn’t an explosion in the money supply? Most economists, myself included, think that easing of credit conditions will be gradual and visible, so that the Fed can exit as the private sector reabsorbs its debt. From a political point of view, to allow a given stock of debt to shift back from public to private hands is neutral with respect to macropolicy, so there is no reason to expect that the Fed will fail to do this. Having said this, however, I think the risk of a future inflationary surge as a result of current policies is not zero. Deleveraging could be reversed at a speed the Fed can’t keep up with. Or the specific markets that would be impacted by a Fed asset sale might not be sufficiently liquid: the Fed holds asset A and the public wants asset B. Or some other problem, currently unforseen, could interfere with the Fed’s withdrawal from private markets. On balance, though, the near-term risk of deflation exceeds the highly speculative longer-term risk of inflation.

2. Has federal Treasury political support to new Keynesian interventions preventing the risk of a double-dip, or the debt-to-GDP, the fiscal deficit-to-GDP and slightly changes from Chinese Central Bank policy gives no fiscal space for those options?

Rewording, I see the question, do either the trajectory of US fiscal deficits/debt to GDP ratio or the prospects for reduced Chinese demand for this debt limit the ability of the US government to implement a second round of stimulus? Again there are two questions.

a) I think the attempt to impose a mechanical rule for fiscal debt/GDP are misguided and have no basis in the historical evidence. The reason is that fiscal deficits are endogenous: they are jointly determined by private sector debt growth, the external balance, terms of trade, and other factors that influence both the numerator and the denominator. (And politics, of course.) Economics has a lot to say about the exact ways these factors interact, but in any given situation you have to evaluate policy on the basis of the full set of variables. For instance, to make an obvious point, on the one hand the US has for some time had a structural trade deficit of substantial proportions, and the economy has organized itself around chronically high private and public deficits. (We are biased toward the production of goods financed by these deficits: housing, military goods, etc.) On the other, the dollar remains the world’s primary reserve currency, and this fact permits the US to borrow much more than others might–the “exorbitant privilege”, in Eichengreen’s term. (Portugal too could borrow much more if the ECB were willing to underwrite all your debt, which they aren’t. We don’t have this problem with the Fed in the US.) In a nutshell, I don’t think the US faces an immediate constraint on its ability to market its public debt, and the deeper problem is the current account imbalance that necessitates this debt.

b) There are many aspects, some rather complex, in the China-US financial relationship, but the broad outlines are simple. China, along with the other surplus countries, finances US net borrowing, and the reason this net borrowing needs to be financed is that these countries have surpluses vis-a-vis the US. In principle, the solution is rebalancing, which would mean less financing and less debt, simultaneously and equally. In real life, of course, there are potential potholes in this road. The main risk is that there could be a sudden stop if confidence in dollar assets drops unexpectedly. This risk is ever-present and is proportional, more or less, to the scale of dollar recycling. Therefore a gradual Chinese retrenchment, if it means reduced trade surpluses, directly or indirectly, with the US, would be very positive for the world economy.

But it’s not only China. The US runs deficits with the EU, the oil exporters and just about everyone else. We need rebalancing on every front. This would remove much of the need for Keynesian stimulus in the US. It should be obvious: a country with a roughly balanced current account finances episodes of fiscal stimulus domestically. A deficit country is likely to require more stimulus more often and must finance to some extent externally. This second condition is less sustainable. You would think we wouldn’t have to argue about this.

3. America and Europe is living a deficit hysteria regarding the hot topic of “debt-to-growth”, or a deficit threshold is a real problem for future growth?

Hysteria.

4. You refer, in your critic of Rogoff and Reinhart debt-to-GDP threshold that the most important is to identify the processes, the mechanisms governing the expansion and contraction of fiscal space. Can you argue more extensively about that?

I think I did this above, up to a point. Perhaps I should emphasize the particular importance of looking at public debt in the context of private debt. The US ran fiscal surpluses under Clinton, but this was possible (especially in a deficit country) only to the extent that private debt exploded. Private deficits fell in the aftermath of the dot.com bubble, and (again in the context of external deficits) the US faced the choice between much higher fiscal deficits or punishing shortfalls in aggregate demand. We went with the fiscal deficits in the 00's, especially since we didn’t face a borrowing constraint. Spain, by contrast, was a model of fiscal rectitude in the 00's, but their external deficits were monumental and financed by private leverage. The collapse of the housing bubble puts Spain in a position like the US in 2002, except (1) Spain’s current account deficit is even larger, and (2) they face a severe borrowing constraint. The moral of the story is that anyone who looked at the US in the 90's or Spain in the 00's and said, “No problem, the public budget is under control” would be making a big mistake. (And to dig back in history, the US emerged from WWII with a gargantuan public debt, far beyond the R&R threshold, but with little private debt in the wake of Depression-era writedowns, and the prospect of large, continuing structural trade surpluses.)

I used the R-R thesis as an opportunity to make a more general point about economics, what it can do well and what it can’t. Economists try to be like physicists, formulating the “laws of nature”. The Reinhart/Rogoff 90% rule is a rough version of this approach, aspiring to provide something like a gravitational constant. But the subject matter of economics is too complex for this approach; it is more like geology or ecology. A geologist does not have a formula that explains the location and height of every mountain range on earth, or even the “mean mountain”, but detailed knowledge of the forces (plate tectonics, erosion, isostatic uplift, etc.) that constitute the menu of possibilities. Then he or she goes to a particular region, provides a deep description of the local factors at work, and applies the knowledge of geological processes.

It is revealing that R&R have very little to say about processes–exactly how public debt/GDP ratios affect further growth. Their comments in this respect are casual, not the product of careful research. Instead, they search for a single, simple pattern in growth/debt ratio space. It is ineffective physics, rather than the geology we actually need.

My apologies. For some reason, my video did not record after 19 seconds. I'm sorry for the inconvenience for those of you who sat through the Budweiser commercial only to find nothing more than 19 seconds. I'll try to redo my talk this afternoon.

I will be posting a new talk this evening. I intend to explain how the combination of competition and new technological economies of scale overaccumulation, which led to both deindustrialization and financialization, which, in turn, led to the current crisis.I will start at 6:00 and will finish before 6:30.

The national debt is rising to levels that have never been seen in the United States during peacetime … This year's federal budget deficit alone is expected to close the fiscal year Sept. 30 in a range between a staggering $1.3 trillion and $1.42 trillion. That's about six times President Ronald Reagan's biggest deficit, and he was blasted as a dangerous budget-buster.

OK, the nominal deficit for this year will be about 6 times the nominal deficit in 1986 but might we also point out that nominal GDP is about 3 times what it was almost 25 years ago?

Tuesday, August 17, 2010

One of the tallest trees in the forest of jazz has fallen: Abbey Lincoln passed away on Saturday. If you've never heard her, you must: you can see a magnificent performance of "First Song" (music, Charlie Haden; words, Abbey) on YouTube.

There are many recordings to choose from, but my own favorite is The World is Falling Down from 1990. Listen to her utterly distinctive version of "How High The Moon," from that album: you will never hear any other version again without comparing it unfavorably to this one. (Jackie McClean, whose sound on the alto sax seems to be what the word "keening" was invented to describe, is a brilliant accompanist here.) A close second is from early in her career, the album That's Him, featuring the saxophone colossus Sonny Rollins and Max Roach, Abbey's husband-to-be, on drums.

Brian Palmer tries to answer his question without ever writing the term patent protection. I find this amazing and I can’t wait for Dean Baker to address this piece. Mr. Palmer uses as an example the drug Avastin which costs $8000 for a month’s supply and writes:

Manufacturing costs play a role in pricing decisions, although a small one. Avastin belongs to a category of drugs called biologics, which are large molecules that usually have to be manufactured by DNA manipulation. Biologics cost more to make than traditional drugs, which usually are generated through cheaper chemical reactions. Still, manufacturing costs normally don't exceed a few percentage points of sales revenue.

The cost of manufacturing pharmaceuticals is often a small percentage of sales which is why they can be so profitable for their makers even though an extensive amount of money is often spent on promoting patented drugs. Mr. Palmer also dredges out this excuse:

You hear a lot about how expensive it is to bring a drug to market.

Credit, however, goes to Mr. Palmer for at least emphasizing the lack of competition for certain drugs. It is true that this sector incurs substantial R&D expenses and the risk that the R&D may generate several dry holes. But do we really need a patent system in order to discover new treatments?

An odd spinoff of the ongoing debate over at http://rjlipton.wordpress.com is a proposal that the genius logician Harvey Friedman (first taught as a prof at Stanford in philosophy at age 18, a world record for youthful professoring) has put forward in the middle of it for refereeing papers at journals, obviously inspired by the ongoing, now many hundreds of entries long, debate over the proposed proof by Vinay Deolalikar that P does not equal NP in computational complexity theory (current consensus: current proof flawed, but argument might still be right, or more likely, proof strategy may be very productive for lesser results).

So, the proposal is that an author is offered the option of public refereeing rather than the standard secretive double-blind type usually done. This public refereeing involves the journal putting the paper up on a website where anybody can publicly critique it. The author can respond and put up new revised versions (and can criticize the editorial board of the journal as well). When the author is satisfied with what has transpired out of the process, s/he can propose that the ed board consider it for publication. They then decide either to publish or not to publish. If it is not published, the last version can either remain up "hanging" on the website or be taken down.

Monday, August 16, 2010

The biased legal system lets bondholders make extortionate demands against workers, poor countries, .... President-elect Clinton learned how bond markets can even intimidate the government from exercising reasonable policies. So, with a bit of schadenfreude, I am glad to learn that Blackstone has the right to screw bondolders. Why should Blackstone have more rights than ordinary people? Why can't we organize to put some limits on the untrammeled power of financial markets, including that of Blackstone?

"It isn't often a 62% premium offers reason for grumbling. Blackstone Group's takeover offer for Dynegy effectively gives it two-thirds of the company's generation capacity plus cash for no money down. That is because NRG Energy has simultaneously agreed to buy about a third of Dynegy's megawatts for $1.36 billion, or about $800 million more than the price tag for Dynegy's equity."

"Why didn't Dynegy sell the assets to NRG and keep the money itself? Probably because it did this a year ago for no discernible gain. In August 2009, Dynegy sold about a quarter of its capacity to LS Power to boost liquidity. That didn't stop the stock dropping from about $10 then to less than $3 before Blackstone showed up.If shareholders are miffed, it is Dynegy's bondholders that have real reason to worry. Should Blackstone decide to dividend the entire proceeds of the NRG deal back to itself, Dynegy will be left carrying its existing debt load on a smaller stream of profits. That would raise the company's already high credit risk. But then Blackstone, sitting on a potential $800 million instant profit and with no other shareholders to protect, need not worry too much about that."

"Alternatively, Blackstone could use some of that profit to buy in some of those bonds. Doing so would reduce Dynegy's debt burden and, possibly, its cash interest costs, potentially boosting Blackstone's return when it sells the company down the road. This likely would only make sense, however, if Blackstone bought the bonds below even today's market values of between 60 and 80 cents on the dollar. Shareholders might wish they got a higher premium. Bondholders may end up scrambling to limit their losses."

Mark Thoma at http://economistsview.typepad.com links to Paul Krugman's latest defense of social security on its 75th anniversary, and Dean Baker has been beating the drums too. I have nothing really original to add to this, but as defending social security against misrepresenting critics has been a core activity of this blog and its predecessor, Maxspeak, from early on, I feel the duty to add to the beating of the drum. "Bipartisan" deficit commission after bipartisan deficit commission seems to find their agreement on doing stuff to social security in the name of deficit reduction, even though social security is the part of the federal budget in better shape than pretty much any other. I think it is the thing that brings together these Washington "experts," who, even if they are not being directly paid by the Wall Street firms that are drooling for the billions from a privatization, they are under the influence of those who have been for so long that those who should know better seem to either forget it or ignore it.

As it is, for this go-around they are pushing for a 70-year retirement age, which Krugman accurately points out seriously hits the poorer groups in the US whose life expectancy is not rising (and, indeed, is falling for some groups, particularly poorer women). The bottom line argument continues to be "cut future benefits now, because, eeek!, if we don't future benefits now, we may need to be cut them in the future,eeek!" meh, feh, gah!

What needs cutting or slowing is the rate of increase of medical costs. Ezra Klein pointed out over the weekend in WaPo that the Repubs are now fighting against the cost control board (IPAB) set up by the Obama health reform, even as they support its spending subsidies, no cuts in defense spending, and the continuation of tax cuts for the rich, all the while playing to the anti-deficit tea partiers, although they do seem to be shying away from Paul Ryan's plan to voucherize social security. And people are whining that the Congressional Dems have nothing to run on this fall?

Saturday, August 14, 2010

I am asking for some help. I am ready to send my article for publication. I have already followed instructions to tone way down my critique of Chicago. Anything that can make the story stronger would be appreciated.

Friday, August 13, 2010

This review is not particularly in itself. It is worth skimming to get the flavor. Once you feel comfortable with what you have read, search for the word "ugly." The idea is that these mostly neoliberal economists claim to have created enormous value for the economy. I assume that the essays were composed before the crash, but the editor claims that our profession deserves extra funding for all the value it created. Could the public demand a clawback to penalize these economists for the harm they have done?

Better Living through EconomicsAuthor:Siegfried, John J.Reviewer:Vedder, Richard

This volume of essays advances the proposition that economic theory and economic research can and has been harnessed to promote human welfare in many different ways, materially improving the quality of our lives and arguably our incomes. Not unusual for compilations of essays, this book contains the good, the bad, and, unfortunately, the ugly. Fortunately, “the good” dominates, and I would say two-thirds of the volume successfully achieves its mission.

John Siegfried, Vanderbilt professor and Secretary-Treasurer of the American Economic Association, seems to be the prime mover on getting this volume published. As Richard Caves states in a cover blurb, many of the “essays are concise, clear and consistently written at a level within the reach of undergraduate economics students.” Good examples include Thomas Tietenberg’s excellent treatment of the evolution of emissions trading to more efficiently deal with restricting environmentally undesirable practices, Elizabeth Bailey’s nice narrative about the benefits of transportation deregulation beginning in the late 1970s, Robert Moffitt’s clear and well balanced discussion of the evolution of the Earned Income Tax Credit, Michael Boskin’s discussion of improvements in measuring inflation, Lawrence White’s analysis of changing views on anti-trust regulation over time, and the Asch, Miller and Warner’s discussion of how the military draft was ended and subsequent issues arising from that. Each of these authors shows that basic propositions taught in any good principles of economics course can be harnessed to make the world work better and more efficiently. Generally speaking, the discipline and self-correcting properties of markets are stronger and more effective in allocating resources than rules-based command decisions made through the political process. Also, aligning incentives with socially desirable objectives pays.

Anne Krueger’s essay stands out in several respects. First, she very convincingly demonstrates that the move away from protectionist/import substitution policies in the 1950s and 1960s harnessed the spirit of enterprise and brought about enormous improvements in the standard of living for literally billions of people. And she appropriately notes that the underlying theory was not discovered by an National Science Foundation grant revealing huge insights, but essentially by the work of Adam Smith and David Ricardo a couple of centuries ago.

This gets to a problem. Economists sometimes get overwhelmed with their own self importance and claim more than they should. John Taylor writes a generally solid essay arguing that reductions in macroeconomic stability in modern times reflects in large part a move to a more intelligent understanding on the role of monetary variables in the economy. Taylor believes the evolution of new economic modeling in recent decades that combine rational expectations with some allowance for price stickiness has brought about enormous policy improvements. Maybe, but I side with commenter Laurence H. Meyer (himself a former Federal Reserve Governor) whose views are “the shifts in monetary policy ... are due more to the rediscovery of classical monetary theory than to advances of modern macroeconomic theory. ... classical monetary theorists had the story basically right” (p. 165). The work of Milton Friedman outlined a half century ago -- itself informed by still earlier work of quantity theorists and neglected practitioners like Clark Warburton -- was far more important than modern-day theoretical refinements.

The less good essays stray a good deal from the stated mission of offering clear, concise explanations of using economics to deal with problems in a language an undergraduate student can understand. Alvin Roth’s paper on deferred-acceptance algorithms is filled with jargon, is exceedingly hard to follow, and deals, frankly, with a far less dramatic advancement in modern economics than improving price indices, promoting the power of comparative advantage, or the gains from transport deregulation. Modest Roth is not -- he cites nearly thirty papers he authored or coauthored in the bibliography. The McAfee, McMillan and Wilkie piece on auctioning spectrum licenses deals with a moderately more important topic, but again gets into too many details of alternative bidding possibilities to be of interest to all but the most gung ho specialists.

Alas, I must come to the “ugly” part of this book. This appears to be not simply a volume of essays to promote the practical dimensions of modern advances in economics, but more an effort to increase the income and prestige of economists relative to other scholars. On page one John Siegfried assets, without a scintilla of supporting evidence, that “the value of the improved policies documented in this volume is likely hundreds of billions of dollars.” His agenda becomes clearer very shortly: “Interestingly ... only a few of the contributions outlined here have been financed or promoted through the private sector” (p. 3). In other words, NSF economics grants have a huge payoff. Charles Plott even goes further: “the social value of the contributions of economics compares well with the contributions of basic research in any field of science.” (p. 6). This, of course, is a normative judgment without a scintilla of rigorous proof, measuring, for example, the rate of return on research in physics or biological sciences with that in economics or psychology (a point that even the NSF’s Daniel Newlon gently takes him to task on).

All and all, this reinforces my own feelings about our profession. For many, Physics Envy is a big cross to bear -- the unwillingness to accept that economics is not considered as respectable as many of the so-called hard sciences. This volume promotes the good economists have done, ignoring the policy disasters that economists have contributed to, for example, the stagflation of the 1970s, or, arguably, even the financial crisis of 2008 -- where were economists in warning about subprime lending, excessive use of untried to financial instruments, etc? Where are we today in opposing stimulus packages that historical experience and economic theory alike say do not work?

But above all, the volume is all about rent-seeking -- a plea to get more economics funding for the NSF and related agencies. It is amazing how much Adam Smith, David Ricardo, A.C. Pigou, Irving Fisher and Milton Friedman contributed to the advancement of human welfare without NSF funds. As Austen Goolsbee notes in a recent NBER working paper, more government grant funding inevitably increases economic rents because of the inherent short-term limits on the supply of good talent. If the authors had stuck to presenting the evidence without its obvious and overplayed commercial message, this would have been a far better volume.

Thursday, August 12, 2010

The leading Bayesian econometrician in the world died last night, Arnold Zellner. A very feisty and provocative individual, he will be missed. I knew him and always found him to be lots of fun and very interesting to talk to. He was one of the first of the econometricians to be hired at the University of Wisconsin around 1960, to be followed shortly by Arthur Goldberger, moving that department from being a near zero in that area to the top ranks, although Zellner did not stay around all that long, moving on to the University of Chicago. However, he was originally attracted to Wisconsin by Bayesians and good time series people in the Statistics Department, such as George Box, who in turn had been attracted by the strong biometricians in the genetics department, the most prominent of whom was the late Sewall Wright, one of the three founders of the neo-Darwinian synthesis in the 1930s, and who invented path coefficients in the teens while co-discovering the identification problem with his economist father in the 1920s while studying corn-hog cycles and other agricultural economics questions.

Anyway, Zellner was a great econometrician and a great guy, and I think that in the long run, we will all become Bayesians, or at least a lot of us.

Here’s the core problem with Reinhart and Rogoff’s claim that public debt levels above 90% of GDP cause reduced growth: it’s all correlation and no mechanism. It epitomizes the worst aspects of empirical economics, searching tirelessly for statistical regularities, but not the mechanisms that might underlie them. Because economic contexts are highly diverse, often singular, it’s the processes at work, not generalizations about outcomes, that economics has the power to elucidate.

Sorry to be so abstract.The R&R dataset, as the authors proudly explain, encompasses 44 countries over two centuries. We’ve got Finland, Spain, Japan and the US, Thailand, Mexico and Colombia. We’ve got the aftermath of the American Revolution against England and WWII, banking crises under the gold standard, the third world debt crisis of 1982. It’s all there in one hopper, ready to be crunched. I would convert to Rosicrucianism before I would embrace the belief that a single statistical relationship captures all these places and times.

Paul Krugman has highlighted two cases in particular, the US demobilization following WWII and the Japanese lost decades (still lost). Yes, he says, there is a correlation between public debt and slow growth, but in the US episode it’s spurious (war gave us the debt, demobilization the slow growth), and in Japan the causation runs from slow growth to high debt.

Just scanning the R&R list, I see lots of countries that have battled external deficits, a condition that weakens growth and puts governments in the position of running deficits in order to delay adjustment. And what about price shocks that cripple countries with a narrow export base or particular import dependencies? The R&R list is thick with these cases too. Given these interrelationships, it is revealing that, under “Debt and growth causality”, R&R consider only “Growth-to-debt” and “Debt-to-growth”, without the vast third category of “joint causation by other factors”.

Which gets us back to mechanisms. What are the forces, economic, political or otherwise, that cause runups of public debt? Under what circumstances does debt feed back to these other factors? What mechanisms govern the expansion and contraction of fiscal space? These are the kinds of things we need to know.

R&R have it backwards: they are looking for broad generalizations that might be identified over large samples but have uncertain application to any particular case. A better kind of economics would be one that identified processes that, while they generate diverse outcomes with no discernible central tendency over large samples, can be applied precisely to individual cases.

Wednesday, August 11, 2010

The press has been discussing that banks are holding onto a great deal of real estate rather than completing the foreclosure process. I asked a prominent real estate figure in Chico about how large this phenomenon was. He replied that although no public data exists, he could show me houses that have ceased payments more than 18 months ago. He said that the banks are even paying the taxes on the properties rather than booking a write-down.

I believe that the "economic way of thinking," as the textbooks have it, destroys the world we have in common, because that world is a world constructed in a normative, not a natural, space and rationality, as economists understand it, is inconsistent with, indeed makes nonsense of, the notion of normative authority. In effect, this point was made 30 years ago by Amartya Sen in "Rational Fools," where he argued that while the economic conception of rationality can make sense of "sympathy," - preference structures that made the utility of others part of the agent's objective function - it cannot make sense of what Sen called "commitment," which he defined as "counter-preferential choice." The idea that we sometimes sacrifice something - lower our utility - to do what is right is absolutely inconsistent with rational choice. I don't doubt that there are people who are well described as rational choosers - and more of them, unfortunately, than there would be had rational choice theory never been invented - but they are damaged humans, sociopaths.

The history of attempts to make sense of normative authority without giving up utility maximization is sad and pathetic and I will not rehearse it here. (The crudest is the attempt to make values a species of meta- or second-order preferences; the problem is that this approach cannot explain why their "second-orderness" gives them any more authority than the first-order preferences they are about.)

At one time, influenced by Mark Sagoff and early Bowles and Gintis, I thought that a reasonable way of "assimilating" the normative, taming it, in effect, was to distinguish between our concern with pursuing our interests and our concern with our identities, with the latter concern giving rise to commitment and making sense of normativity. So I refrain from doing something that would serve my interests because I am (we are) not the sort of person (people) who would do such a thing. This sort of thing is perfectly compatible with utility maximization, as the Akerlof/Krainton papers have shown, and therefore perfectly inconsistent with Senian commitment.

Here is the deeper problem with using "identity" to make sense of commitment: the criteria of identity are, if identity is to underpin the normative, themselves normative, not natural. My commitment to honest inquiry is tied to my identity as a "scientist," say- but scientists understood as honest inquirers, not scientists per se -many of whom are not honest. So appeal to identity to make sense of normative authority is, or can be, question-begging.

I have a couple of overdue reports to get out, so I have to be brief. Raghuram Rajan has played an important role in keeping attention focused on global imbalances, but his solutions are hardly solutions at all.1. Differential savings rates, too low in the US and other deficit countries, too high in China and the other surplus countries, are primarily the consequence and not the cause of imbalances. I presented the evidence for this three years ago and see no reason to change my assessment. In any case, the surplus-deficit conundrum has been with us for more than a century, and historians have no trouble in identifying the problem. Deficit countries are uncompetitive; surplus countries have organized their economy to take maximum advantage of export opportunities.

2. China’s main problem in rebalancing is not simply the structural difficulty of converting an export-oriented capital stock to one that serves the domestic market. This will be hard, but my rough reading of history is that it is a mistake to assume that capital is all clay and no putty. (Vice versa too.) The real challenge is that successful surplus countries have managed to outcompete those who are less successful, and it is all but impossible to simply discard these victories. Can China adopt policies whose result is the conquest of markets by other developing countries that China used to dominate? This is an economic problem, because the shift of export production out of any one country in a competitive environment can be uncontrollable. It is a political problem, because Chinese firms will use all available influence to prevent it. (See this sensible overview by Jeffrey Frieden.)

3. The US problem is not that consumers spend too much, but that (1) given a trade deficit that is a substantial share of GDP, consumption can be maintained only by borrowing, and (2) US producers are uncompetitive in tradables. This will not be fixed overnight, and we won’t even begin repairs until we see what’s broken. Of course, the root cause of the US external deficit is not poor eyesight, but political economy: wealthy individuals and institutions changed the rules over several decades so they could maximize their global returns. They still run the show.

4. The conventional short run/long run dichotomy is associated with fiscal policy: we need deficits today to shore up demand and fiscal rectitude in the long run to achieve sustainability. In a sense, this is right, but it is drastically incomplete because it fails to take account of the relationship between public budgets, private budgets and the trade (or current) account. The real short run problem is that, given the lack of US competitiveness, a devastating austerity can be avoided only through high levels of borrowing, either by households, firms or the government. Since private borrowing is at a standstill, that leaves the US Treasury as the last line of defense. But this solution is not sustainable. The long run goal has to be approximate trade balance, especially since there is no reason why private investment prospects, and therefore global demand for US financial assets, should be counted on to be superior to foreign prospects over the long haul. Only by balancing trade can the US households, firms and government all achieve viable budget positions.

5. Can the US rebalance trade on its own? I doubt it. Will a coordinated dollar devaluation do the trick? Maybe, if you can get coordination (no easy feat), but it is also possible that US capacity in tradables has deteriorated too far for price adjustment alone to succeed. My view: we need a trading system that institutionalizes the collective interest in avoiding destabilizing imbalances. That will take a global political movement that I can’t even begin to visualize.

In the last two days a firestorm has erupted over a claim by HP Labs computer scientist, Vinay Deolalikar, http://wwww.hpl.hp.com/personal/Vinay_Deolalikar/Papers that he has proven one of the six remaining Clay problems for which a million dollar prize is offered. In particular, he claims to have proven that polynomial time algorithms (P) cannot in general solve exponential time problems (NP), or are not equivalent in power to them. It has long been suspected that this is the case, but has not been proven so far. This has implications for computational complexity theory and computable and computational economics.

The paper is over 100 pages long and involves ideas drawn from model theory in logic as well as statistical physics, an approach not used for anything previously, and so far in the enormous debate that has erupted, there is not yet a definite answer if Deolalikar is right or not, although some minor errors have definitely been found. An aggregator site for this debate is at http://michaelnielson.org/polymath1/indep.php?title=Deolalikar%27s_P!%3DNP_paper. This site provides links to others where more detailed debates have been occurring, with the ones starting with http://rjlipton.wordpress.com being especially insightful and providing most of the mathematical meat picked up on the aggregator site.

Tuesday, August 10, 2010

Tonight's talk will answer some questions about the first talk, then discuss new technology and replacement investment – all leading up to crisis theory, but that is a way off.http://www.ustream.tv/broadcaster/5149208

Monday, August 9, 2010

Juan Cole (http://www.juancole.com) has a guest editorial today by Mahan Abedin who reports that US Joint Chiefs Chairman, Mike Mullen, has made statements that the US is contemplating a "limited war" to block Iran from getting nuclear weapons. Abedin reports that this appears to be a shift of policy, at least in the open, and warns it would not work, with Iran likely to fight back very hard with great impact.

It should also be kept in mind that there continues to be no evidence of Iran actually pursuing nuclear weapons, although arguably it has been pursuing a possible capability to build them. However, the fatwa of the Commander-in-Chief, Ali Khamenei, against nuclear weapons remains in place, as does the official US NIE supported by all US intel agencies declaring that they are not actively pursuing nuclear weapons, despite all the shouting in the media claiming that they are. This may be the result of rumblings arising from the new anti-Iran UN sanctions reportedly biting, with who knows what going on in the background, although there are clearly parties who would just love to have the US go after Iran militarily. Very. Bad. Idea.

Where I live, Harrisonburg, Virginia, has only 45,000 people in it. Yet, somehow two of the ten people killed in Afghanistan on a medical mission of mercy have connections to here. One was Glenn Lapp, a 40 year old nurse who has been involved with administration at the International Assistance Mission (IAM), but went on this trip. He was a 1991 graduate of Eastern Mennonite University here in Harrisonburg, and has been involved with Mennonite missions abroad. I note that the Mennonites are a pacifist church and do not actively proselytize abroad, in contrast with the claims made by the supposed Taliban defenders of this killing.

The other was Brian Carderelli, age 25, a graduate of James Madison University here in 2009, whose parents apparently teach in Kabul. His identity has only just been confirmed within the last few hours. The claims that these people were spying or handing out Bibles in Dari are just ridiculous. The group's leader, Tom Little, has been there since 1983 doing these activities, the period when there was a Soviet-dominated government. He survived through the years of outright Taliban rule. Some are suggesting that the real reason for the killings was robbery, being covered up by these ridiculous claims of spying and Bible handing out.

On the broader issue this is all very depressing. I supported going into Afghanistan, in contrast to Iraq, and I agree with Obama that invading Iraq really messed up the situation in Afghanistan. But that is a very complicated and difficult place, and it is unclear it would have been all that great if we had not invaded Iraq. It looks like it is time to get out, although this will have to be done with some care. In the meantime, we get tragedies such as these murders.

Sunday, August 8, 2010

I have been meaning for some time to offer a series of posts about the plague that is devastating education, even though education is supposed to fuel economic growth. I was stirred to stop procrastinating by a note in yesterday's Wall Street Journal, which reported that the Washington Post's Kaplan "education division, which accounts for more than 60% of total revenue, increased 15% to $747.3 million. The bulk of Kaplan's revenue comes from the higher-education unit, consisting of a group of for-profit colleges that primarily offer certificate, associate's and bachelor's degrees."

I am going to start out with a shocking piece from the New York Times, which describes the enormous salaries given to presidents of elite universities to serve on corporate boards. Administrative salaries alone should be enough to create an outrage now that money for teaching is drying up. These presidents might be expected to offer a patina of respectability for the corporations. Even more, presidents, who want to keep their lucrative board positions, will be careful not to offend corporate America. Others who want to have comparable money thrown at them will be equally careful. Here is the article:Bowley, Graham. 2010. "The Academic-Industrial Complex." New York Times (1 August): p. BU 1.http://www.nytimes.com/2010/08/01/business/01prez.html?_r=1&hpw=&pagewanted=all

"What does Shirley Ann Jackson know about shipping parcels? For that matter, what does Steven B. Sample understand about mutual funds? Dr. Jackson, who is a theoretical physicist and the president of Rensselaer Polytechnic Institute in Troy, N.Y., has served as an outside director on the board of FedEx since 1999."

"Dr. Sample, an electrical engineer and the retiring president of the University of Southern California, sits on the boards of directors of the American Mutual and Amcap mutual funds. He is also a director of another company, and stepped down two years ago from the board of the Wm. Wrigley Jr. Company, the candy maker."

"Dr. Jackson and Dr. Sample are part of a cozy and lucrative club: presidents and other senior university officials who cross from academia into the business world to serve on corporate boards. While academics can often bring fresh perspectives, managerial experience and the imprimatur of a respected institution to a board, they are also serving in an era when corporations wrestling with fallout from the financial crisis (think Bank of America, Citigroup and Goldman Sachs) or very public mishaps (think BP, Johnson & Johnson and Toyota) have raised the stakes for board members expected to guide corporations."

"Some analysts worry that academics are possibly imperiling or compromising the independence of their universities when they venture onto boards. Others question whether scholars have the time -- and financial sophistication -- needed to police the country’s biggest corporations while simultaneously juggling the demands of running a large university. "It is prestigious for a company to have a major university president on their board,"says Pablo Eisenberg, senior fellow at the Georgetown Public Policy Institute. "But few college and university C.E.O.’s are even qualified to understand the workings of a major public company"."

"According to a 2008 survey by The Chronicle of Higher Education, presidents from 19 of the top 40 research universities with the largest operating budgets sat on at least one company board. The trend is more widespread among public universities, but the private ones are catching up: the American Council on Education says that from 2001 to 2006, the proportion of presidents from all doctorate-granting institutions sitting on corporate boards rose to 52.1 percent from 47.8 percent at public institutions, and to 50.9 percent from 40.6 percent at private ones."

"Some of the more high-profile and ubiquitous academics include the president of Stanford, John L. Hennessy, who sits on three boards, including that of Google. (Google also has the president of Princeton, Shirley M. Tilghman, on its board.) The chancellor of the University of California, San Diego, Marye Anne Fox, is on three boards. And then there is Dr. Jackson of Rensselaer, the highest-paid private college president and one of the most prominent black university leaders. In addition to FedEx, she sits on the boards of four other companies, including I.B.M. and Marathon Oil, and she recently stepped down from the board of NYSE Euronext."

"The attractions are clear for the president: lucrative extra pay and useful networking, among other reasons. For a dozen hours or so each month for each board served, in addition to preparation time, and their wise advice, they can receive hundreds of thousands of dollars a year. Ruth J. Simmons, the president of Brown University and the first African-American woman to lead an Ivy League university, sat on the Goldman Sachs board until she stepped down this year. In 2009, she earned $323,539 from her Goldman directorship, including stock grants and options, as calculated by Goldman, and left the board with stock worth at the time around $4.3 million. This is in addition to her salary from Brown, $576,000 this year."

"Dr. Jackson earned $1.38 million from her directorships, comprising both cash and stock. That’s in addition to $1.6 million from her day job, including bonuses and other benefits. Beyond personal financial benefits, the interchange of ideas between campus and corporation can allow for a fruitful cross-fertilization. For example, Dr. Hennessy sits on the boards of Cisco Systems and Atheros Communications as well as Google. As an electrical engineer and a pioneer in computer architecture, he is well placed to bring industry expertise to the boards he serves."

"William G. Bowen was president of Princeton University for 16 years and served on two boards, including Merck’s. It was an experience, he says, that was invaluable in helping him build up Princeton’s then-fledgling life sciences activities. "It influenced my understanding of how the field was evolving, where new ideas were most likely to appear, where to look for talent,"he recalls. "It was one long seminar in the sciences and molecular biology"."

"Indeed, the path from academia to corporate boards began broadening in the late 1990s when companies sought to break up the traditionally white, male composition of their boards. Academia, and in particular university presidents, were a good source of prominent minority leaders and women who were established in their fields and had experience running big organizations."

"Phyllis M. Wise, the provost of the University of Washington, is on Nike’s board. Nike said it hired Dr. Wise, an Asian-American, "because of her impressive accomplishments and her record of independent thought, and we believe that through the exchange of ideas, both Nike and the University of Washington will benefit"."

"But according to James H. Finkelstein, a professor in the George Mason School of Public Policy, probably the biggest reason companies have sought out academics is the prestige they bring. Universities are among the few institutions trusted by the public, he says, and companies believe they can associate themselves with this quality by installing an academic on the board."

"Corporations think this is a way of enhancing their prestige and legitimacy, especially in the case of Ivy League presidents,"he says. "I suspect that’s the principal motivation. It’s probably not for their business sense."

"John Gillespie, who has written a book on corporate boards, "Money for Nothing,"says academics are often selected for another reason -- because they are less likely to rock the boat than directors from the business world. Academics may be trained to ask tough questions in their own fields, but when confronted with tricky business issues far above their level of expertise they "often become as meek as church mice,"he says."

"Most corporate governance experts think that a president serving on one board brings benefits to both the company and the university, but the situation becomes problematic as these academics serve on more boards. There may be diminishing returns to the university and less time to be an effective board member."

"Nell Minow, editor of the Corporate Library, an independent research firm focusing on corporate governance, says Goldman Sachs was hurt having Dr. Simmons as a director because she lacks financial expertise and was focused more than she should have been on other things like the firm’s philanthropy. She was chairwoman of the advisory board for a Goldman initiative, 10,000 Women, that provides women outside the firm with business and management education."

"That seat could have been held by someone who understood derivatives,"says Ms. Minow. "What we have learned from the financial crisis is that boards of directors have failed miserably in their No. 1 task of risk management. You don’t go on a board for networking, seeking contributions or working for minorities. You go on a board for one purpose -- to manage risk for the long-term benefit of the shareholder."

"Dr. Simmons declined to comment for this article. In an interview early this year after she announced she was retiring from the Goldman board, she said filling boards with specialists was "exactly the wrong direction." "You need people close to the industry to provide depth of experience, but you also need people with perspective,"she says."

"In the case of Dr. Jackson and her five board appointments, Ms. Minow says, "it is just physically impossible to do the work necessary to be a good director"on so many boards. The Corporate Library estimates that board members must invest 240 hours a year, including meetings and preparation, to do the work properly. But it can become a full-time job if the company runs into trouble."

"At the time, Goldman was being battered by questions about its involvement in the financial crisis and the lucrative pay it doled out to executives and employees even after the firm had received a huge taxpayer bailout. As a director, Dr. Simmons was partly responsible for approving Goldman’s bonuses during the boom years — including the $68 million pay package awarded to its chairman, Lloyd C. Blankfein, in 2007, the largest ever on Wall Street. Early this year Dr. Simmons said the criticism directed at Goldman was not the reason she gave up her position. She would not comment on whether the salaries the board had approved over the past decade were appropriate, except to say, "The environment for salaries on Wall Street has evolved over a period of time, and the environment today is different"."

"As a further sign of how complicated the issue can become, some academics at the University of Washington protested that Dr. Wise’s presence on the board meant they would not be able to criticize Nike over its labor policy, in particular the treatment of workers at factories in the developing world. "She is the chief academic officer of the university, to whom all faculty report, and her affiliation with Nike creates incentives for faculty to be less vocal about Nike’s human rights record," said Angelina S. Godoy, director of the university’s Center for Human Rights. However, Ms. Godoy said a recent landmark agreement between Nike and unions in Honduras made her less concerned about the university’s relationship with Nike."

This report in today’s New York Times makes it clear why the opposition of the Anti-Defamation League to a Manhattan mosque was so squalid. It is not just about one building downtown; it’s an episode in a nationwide assault on the rights of a minority—exactly the kind of group the ADL of old could be relied on to protect.

The old guard Jewish organizations are radically out of step with the values of most Jews in America, who continue to support equality and inclusion as core social principles. Bigotry may rule in Israel, but it remains anathema here, at least among the liberal half of the population, where most Jews are to be found. Either the misguided leadership of the mainstream Jewish organizations must be retired, or the organizations themselves have to be replaced.

An interesting question is posed in the latest post by Rajiv Sethi on growth prospects for Sub-Saharan Africa. The core issue is whether, in a world characterized by multiple equilibria, it is historical inertia (transmitting local equilibria from one period to the next) or expectations (converging airlessly on new, possibly distant equilibria) that perform the selection. Sethi pulls out an old paper by Paul Krugman that zeroes in on the question.

The Krugman paper, as described by Sethi (I haven’t read the original) uses increasing returns in a two-good model to construct a two-equilibrium result, and the history-expectations dichotomy is resolved by the assumption that expectations will be decisive if the initial conditions are consistent with the attainment of either equilibrium.

My conjecture: this result, which is to say the assumption that convergent expectations can generate a leap from one local equilibrium to another provided either is feasible, depends on the number of potential equilibria and the complexity of the processes that generate them. Of course, if an economy’s structure is perfectly known to agents, complexity is not a problem, but it is safe to say that this knowledge is unattainable. (I’ve been trying, and it’s unattainable to me.) What we have, then, is a constraint on the role of expectations derived from the likelihood that they can converge on a multi-dimensional outcome complexly different from that inherited from the past.

Krugman’s model, if it is described properly, obscures this by proposing an extremely simple and transparent equilibrium selection choice. No doubt there are cases where such an assumption is warranted. But, as I argued long ago, the problem of multiple equilibria becomes far more general and complex when one incorporates interaction effects compared to increasing returns. (In technical terms, if you are looking at a matrix of send-order partial derivatives, increasing returns show up on the principle diagonal, while interaction effects are non-zero terms off the diagonal.) The factors that cause multiple equilibria entailing good x may be lodged in non-x sectors, interacting with x only through derived demands. Indeed, the processes may be so ramified that they resist any realistic strategy to disentangle them, such as would be required for a selection process based on expectations.

This is why, in the end, I think history plays by far the largest role in equilibrium selection. (It is also why I think that equilibrium methods are ill-suited to economic analysis.)

Saturday, August 7, 2010

I am planning on doing a second streaming video. I want to briefly answer a few questions raised about the first talk. Then I will take up where I left off and discuss the question of capital replacement, which I believe to be a key element of the current crisis.go to:

After several months delay, the Social Security Trustees have finally issued their report, which has received little MSM attention, with some outfits like the Washington Times putting out canned reports that do not reflect the contents of the report at all. For all the moaning and wailing and gnashing of teeth and shrieks of hysteria over the state of social security coming out of the deficit commission, the new report shows almost no change in any of the projected dates of any matters of interest. There is no immediate crisis, and the supposed dates of various shortfalls are barely changed. On top of which, the future of medicare actually looks much improved.

Although others have the story, the best coverage as usual of both the details of the report as well as the surrounding (lack of) media coverage is due to Bruce Webb over at angry bear (thanks again, Bruce, for your excellent efforts!). http://www.angrybearblog.com/search/label/social%20security.

Thursday, August 5, 2010

Daniel Mitchell who only pretends to be an economist writes more spin on the wonders of Reaganomics:

Both Ronald Reagan and Barack Obama entered office during periods of economic misery. But they adopted dramatically different solutions. Reagan reduced the burden of government and Obama increased the burden of government. So which approach worked best? In his Washington Times column, Richard Rahn compares the economy’s “recovery” performance under both Presidents. As you can see, Reaganomics is much better than Obamanomics.

I’m scratching my head here as I thought the standard pseudo-supply-side line was that the deficit exploded in the 1980’s because government spending exploded. OK, the truth is that the ratio of Federal spending to GDP neither increased nor decreased during this period. Real tax revenues per capita fell which is why the deficit rose but this notion that the burden of government fell is not factually based.